Results Review

• SLP Resources Bhd’s (SLP) 1Q2019 net profit were almost unchanged at RM6.3 mln (- 0.3% Y.o.Y), mainly due to lower polymer sales in-tandem with weaker local demand, albeit slightly cushioned by higher export sales of flexible packaging products. Revenue also slipped 2.5% Y.o.Y to RM43.1 mln, from RM44.2 mln last year. Even so, SLP has declared a first interim dividend of 1.0 sen per share, payable on 5th July 2019.

• The latest earnings only made up about 18.4% of our forecast net profit, while revenue accounted for 20.2% of our estimated full-year revenue. However, we were not surprised as we expect SLP to play catch-up in the 2H2019 due to seasonal factors and better product mix. Consequently, we leave our estimated net profit and revenue forecast for 2019 unchanged at RM28.0 mln and RM212.8 mln respectively. Downside risks to our forecasts include slower-than-expected demand and sudden increases in resin prices.

• We note marginal improvement in its net profit margin at about 12.0%, compared to 11.7% in 1Q2018, while EBITDA margin rose to 17.7% vs. 16.1% in the previous corresponding period, mainly due to increased orders for flexible packaging products.

• SLP’s cash holdings (excluding cash in Islamic accounts) stood at RM44.2 mln as at 30th March 2019, below the threshold of the shariah ceiling (i.e.: 33% of total assets), indicating a potential re-entry into the shariah-compliant list in November.

Prospects

Moving forward, we believe that the group will focus on bottomline growth by introducing higher-margin products, coupled with ongoing capacity expansion and continuous investment in researching innovative products. Meanwhile, new blown film lines will be gradually installed from April onwards, in addition to new bag making and side seal machines.

To recap, the group has introduced its line-up of eco-friendly packaging products, which includes NPE and OPE films, in-view of the rising demand for sustainable plastic packaging solutions. SLP’s “green” products are expected to be launched in Indochina and could open up opportunities for higher orders from the healthcare and F&B segment amid increasing efforts by MNCs to reduce cost and environmental footprint.

Cost-wise, resin prices have remained on a downtrend (Appendix 1) due to weak demand and increased supply following the diversion of U.S. polymers to the South East Asia region amid ongoing Sino-U.S. trade war. However, benefits from the lower raw material prices will be slightly offset by rising labour, utilities and depreciation charges, as well as tax expenses.

Consequently, we foresee a low double-digit growth in both the revenue and net profit in 2019, while five-year net profit CAGR is expected to be around 4.5% per year to RM34.0 mln in 2020. Meanwhile, orders from Japan is expected to remain resilient as turnover hit RM18.5 mln, from RM17.0 mln in 1Q2018, accounting for 43% of group sales, while local sales made up about 39%.

Valuation and Recommendation

Although we remain positive on the long-term growth prospects of SLP, we maintain our HOLD recommendation on the group with an unchanged target price of RM1.30 as we believe that valuations are stretched at the current juncture, given that its forward PER of 14.5x is close to the industry benchmark PER of 15.3x, indicating limited upsides.

Our target price is based on a target PER of 15.0x to our 2019 EPS of 8.8 sen, while the assigned PER is also notably higher than its closest peer, Thong Guan Industries Bhd which we think is justifiable due to SLP’s stronger growth prospects and superior double-digit margins.

Source: Mplus Research - 6 May 2019